The housing game has changed. Are you playing to win?

Coverage opportunities abound as more rental units are going up to meet demand.

With home ownership remaining an unattainable goal for many, rental property construction is up as more people are renting rather than buying. And with this increase comes opportunity for producers schooled in the process of insuring these units.

Multifamily apartment starts rose 55% in June year-over-year, according to the U.S. Census, and the supply of apartment units remains far lower than demand. Apartment occupancy, meanwhile, hit a near-record high of 95.2%.

For now, insurers are observing an increase in renters and rental-property construction. “Data suggests that there is more multi-family construction,” says Angi Orbann, second vice president, Personal Insurance, at Travelers. “There's a focus on apartments because of demands from the rental population.”

Much of that increase in construction depends on region: Gene Sandy, director of marketing at Millennium Alliance Group, an independent insurance agency in Syosset, N.Y., says construction in the Long Island area continues because a need for affordable housing: “We’re seeing more and more condos being built for people 55 and over.”

Loretta Worters, vice president of communications for the Insurance Information Institute (I.I.I.), says in urban areas like New York, condos are being built every day, and there is an increase in high-rise units in Miami.

In Boston, Dick Lavey, president, Personal Lines, for the Hanover Insurance Group, says he's seen an increase in demand for rental properties from a “young professional population looking to rent rather than own,” and apartment buildings are going up to meet that demand.

When insuring rental properties, pricing depends primarily on location and the type of construction, says Sandy, noting that rates have been consistent for properties of better construction. “When you’re talking about, say, high rises, rates have been level throughout the years,” he explains, adding that rates could be rising for frame construction or properties close to water.

Lavey also says construction and geography are the two biggest considerations when it comes to pricing, but he notes an additional factor: Large apartment complexes are more subject to the pricing cycles seen in Commercial Property and the broader commercial lines market. “When you think about property coverage for those types of complexes, that's a commercial policy,” he says. “It's not owned by an individual, it's typically owned by an entity or a business. And those do face the same kind of pricing cycles that commercial property does.”

Jim Auden, managing director at Fitch Ratings, says results have been good overall in commercial property, “but rates have gotten really soft there with the lack of catastrophe losses in the last few years, and I think that will continue until there is an event.”

By contrast, individual or two-family homes used as rentals typically follow the trends seen in the Homeowners’ insurance market, which Lavey notes is less cyclical and tends to move with the Consumer Price Index, inflation trends and cost of materials, in addition to being impacted by weather events.

As for the greater number of renters themselves, and whether they present an opportunity for insurers, I.I.I. President Bob Hartwig says there has been some progress in demonstrating the value of Renters’ insurance. He says that while only about 40% of renters have a policy today, that's up from around 27% five years ago. Still, this compares to about 90% of homeowners who are insured. Hartwig also notes the dollars involved are not as large for Renters’ policies.

But selling a Renters’ policy, he adds, does allow an insurer to get its foot in the door and potentially sell customers on a Homeowners’ policy if they decide to purchase a house later.

Orbann says the greater number of renters does present an opportunity for agents to initiate conversations about coverage, particularly as they are discussing Auto insurance with customers: “We’re making efforts to allow agents to reach out to customers through social media, e-mail, website content … we definitely see it as an opportunity for our agents.”

But, like Hartwig, Orbann believes the trend toward more renters could turn. “I think what we’re seeing is definitely an impact of the recent economy,” she says. “In the past, typically the first purchase of the home was happening earlier in life stages than it is now. Some of those coming out of college are saving more, renting longer and waiting to purchase that first home until later.

“We expect them to eventually purchase homes,” she adds. “But as far as when that happens, it’ll be interesting to watch.”

And despite the recent trend toward more renters and rental properties, insurers do not appear to be making major changes in how they conduct business. “It's not making us dramatically shift our strategy,” says Lavey. “We still work on the full account, where we attempt to have the Homeowners’ policy, as well as the dwelling and fire policy on a property a customer is going to rent out to other people.”

Homeowners’ market

According to a recent Moody's Personal Lines Outlook, Homeowners’ insurers were profitable through the first half of 2015 after two straight profitable years in 2013 and 2014. Homeowner's insurers have benefitted from continued rate increases, although Moody's notes these increases are slowing — from 7% in 2013 to 5.4% in 2014, to about 4% expected in 2015, partly because of lower catastrophe reinsurance costs.

Those lower prices, which stem from an influx of capital into that market, are driving different strategies among Homeowners’ insurers, says Lavey. For some, the savings are going right to their bottom line, while others are buying up more reinsurance because it's so afforable. “The implication of that isn't that it's flowing down and we offer cheaper rates,” he explains. “It's that we can think of taking on more risks.” When considering an effective aggregation-management strategy, he adds, more reinsurance means being able to have a bit more aggregation in certain pockets.

Insurers have also been helped in recent years by no major hurricane losses or other single major events, although Fitch's Auden notes Homeowners’ insurers have been “getting blasted” by more incremental losses from hail, winter storms, tornadoes and other weather events.

“Most major insurance carriers that write Homeowners today have moved to a by-peril rating approach, as opposed to an all-peril rating — and we are in fact doing the same,” says Lavey. “We’re in the process of building that, and will be introducing it into 2016 and 2017.

“It's akin to what happened in the auto industry: You’re just getting more refined pricing segmentation, and when you think about it, it really is the right way to price Homeowners,” he continues. “You want to match the risk — the peril — to the geography.” Lavey says by-peril rating is an option today because of the greater amount of data available, and ultimately it allows insurers to apply discounts based on where a home is located.

“Arguably, those who don't move to a by-peril approach could face adverse selection,” says Lavey, “because those who have a sophisticated pricing approach will be able to offer the best price for that risk,” whereas insurers that price all risks as one will not get the best risks in that given geography.

Another strategy Auden mentions is an increasing focus on insuring higher-end homes and customers, which gives insurers an opportunity to capture more coverages, as such customers will likely have more to insure and typically purchase additional policies such as umbrella. He cites the ACE/Chubb deal as an example of carriers sharpening their focus in this area.

As insurers identify trends and refine their approach to Homeowners’ insurance, they do so in a favorable environment. As Aon Benfield notes in its recent “Homeowners ROE Outlook,” “For a nationwide, personal lines insurer, the overall outlook for the Homeowners line of business continues to be positive,” citing widely available reinsurance capital, continuing rate increases and the move toward by-peril rating plans: “In a world of persistently low investment yields, our country-wide prospective after-tax ROE [return on equity] estimate is 8.6%, up from last year's 7.9%.”

Room for improvement?

While home ownership is certainly being delayed for the millennial generation, I.I.I. President Hartwig said he believes the pendulum is expected to swing again.

“You do have an increased proportion of the population renting, but I think that reflects the fact that just about everything the millennial generation is doing is happening with a delay — in part because of the deep recession,” he says. That modest pace, he adds, has led to a “mistaken view that people don't want to own homes anymore.

“Coming out of the recession, growth was slow in many industries, particularly in the area of homeownership,” Hartwig adds. “Many people had their credit damaged, and many people were still underwater with respect to their homes.”

As a result, he says, “People married later, and are having children later. But the next generation will live in their own homes, they will reproduce, and the human species will continue.”

And with rent costs rapidly increasing, Hartwig believes homeownership will soon become a better deal than renting.